This tax season, we’ve worked through many cases involving transactions like the Scale AI restructuring and Meta-related investments. In particular, one pattern keeps coming up. Clients receive a Form 1099-DIV with a large number in Box 3, and that amount is often much higher than what they originally paid for their shares.

Naturally, the first reaction is confusion. Many clients ask: “I didn’t sell anything… so why is there tax?”

Understanding what Box 3 actually means

First, it’s important to clarify that Box 3 is not dividend income. Instead, it represents a nondividend distribution.

In practice, the IRS applies a simple rule. You recover your original cost first. Then, any remaining amount becomes capital gain. Therefore, the tax outcome depends heavily on your basis.

Walking through a simple example

Let’s look at a straightforward example.

You exercised ISOs earlier:

• Shares: 10,000
• Exercise price: $2.00
• Total cost (basis): $20,000

Later, as part of a transaction like Scale AI / Meta:

• You receive: $150,000 cash
• You still hold all your shares

Now, the math becomes clear.

First, you recover your $20,000 basis. After that, the remaining $130,000 becomes capital gain:

$150,000 − $20,000 = $130,000

Even though you didn’t sell any shares, the IRS treats the excess like a sale.

Adding the AMT layer

Next, we need to consider AMT, especially if your shares came from ISOs.

At the time of exercise:

• Fair market value: $6.00
• Exercise price: $2.00
• Spread: $4.00 per share

As a result, the AMT adjustment equals:

10,000 × $4.00 = $40,000

You report this amount as additional income under AMT, even though you didn’t sell anything.

Why AMT shows a different gain

Because of the ISO adjustment, AMT uses a different basis.

• Regular basis: $20,000
• AMT basis: $60,000

Now, when we recompute the gain:

$150,000 − $60,000 = $90,000 AMT gain

So, you end up with two different results.

• Regular gain: $130,000
• AMT gain: $90,000

The difference is $40,000.

How this appears on your tax return

This difference flows through Form 6251.

• Line 2i shows +$40,000 from the ISO spread
• Line 2k shows −$40,000 from the lower AMT gain

Together, they offset. This outcome is expected and reflects the correct mechanics.

Why this surprises so many people

On one hand, you didn’t sell shares. On the other hand, you received a large amount of cash. Because your original basis was low, most of that cash becomes taxable gain very quickly.

As a result, many clients feel caught off guard by the size of the tax impact.

Common patterns we’ve observed

Across many cases this season, we’ve consistently seen:

• Large Box 3 distributions
• Low exercise cost from early equity
• Significant capital gains without an actual sale
• AMT adjustments layered on top

Final takeaway

In summary, these transactions are not simple income events. Instead, they follow a sequence:

• First, basis is recovered
• Then, capital gain is triggered
• Finally, AMT adjustments are applied if ISOs are involved

If you received a large Box 3 amount, it’s important to review how your basis and AMT were handled. Small differences in calculation can lead to significant changes in tax.

If you’re seeing something similar on your return, you can check with your tax advisor, or feel free to reach out to us. We’ve worked through many of these cases this season and are happy to help review your situation.

#ScaleAI #Meta #StockCompensation #ISO #AMT #CapitalGains #StartupEquity #TaxPlanning #PrivateEquity

The post Scale AI / Meta Transaction — What That Cash Dividend Actually Means for Your Taxes (Simple Breakdown + Case Study) appeared first on Flex Tax and Consulting Group (FTCG).

Understanding the OBBBA Changes

Many high-earning individuals focus on mortgage rates when buying a house. However, few realize that tax law timing can have a six-figure impact on their real after-tax cost of ownership.

The One Big Beautiful Bill Act (OBBBA), effective July 2025, introduced several key adjustments affecting homeowners and real estate investors. Consequently, understanding how these new provisions interact with income, property value, and filing status is critical for effective planning.

Key Changes

Scenario: High-Income California Buyer

Profile:

• Annual Income (W-2 + bonus): $500,000
• Filing Status: Married Filing Jointly
• Home Purchase: $2,000,000 primary residence in Los Angeles
• Down Payment: $500,000
• Mortgage: $1,500,000 at 6% interest
• Annual Property Tax: 1.2% of value = $24,000
• State Income Tax (CA): ~9.3% marginal = $46,500
• Other Itemized Deductions (charity, etc.): $5,000

Before OBBBA (Old Rules)

1. SALT Deduction Cap

• Combined CA income tax ($46,500) + property tax ($24,000) = $70,500
• SALT deduction capped at $10,000
• Result: $60,500 in lost deduction potential

2. Mortgage Interest Deduction

• Interest on first $750,000 of mortgage debt deductible
• Mortgage = $1,500,000 → 50% of interest deductible
• Annual interest = $90,000 × 50% = $45,000 deductible

3. Total Itemized Deductions

Effective Federal Tax Benefit:
$60,000 × 37% = $22,200 reduction in federal tax liability

After OBBBA (New Rules)

1. SALT Deduction Cap Raised

• New cap = $40,000, phased out for AGI > $500K
• In this case, assume partial phase-out allows $30,000 deduction

2. Mortgage Interest Deduction

• Rule unchanged ($750K limit), but made permanent
• Still $45,000 deductible

3. Total Itemized Deductions

Effective Federal Tax Benefit:
$80,000 × 37% = $29,600 reduction in federal tax liability

Net Difference

Over a 10-year mortgage horizon, that’s roughly $74,000 in additional tax savings purely from timing and deduction differences.

Strategic Takeaways

1. Buying after OBBBA is not automatically better — it depends on income, state, and timing.
   For AGI over $500K, the SALT cap benefit begins to phase out.
   For those below, the new $40K limit offers substantial relief.
2. Property-tax prepayment and mortgage structuring are now bigger levers than interest rates.
3. For mixed-use properties, entity-level PTE elections can bypass individual SALT limits.
4. Accelerate qualifying energy improvements before 2025 year-end to maximize remaining credits.
5. Maintain digital documentation of all property-related payments and lender reports to prevent audit exposure.

Conclusion

For high-earning individuals, real estate isn’t just an investment — it’s a strategic tax tool.
The One Big Beautiful Bill Act widened opportunities for deduction recovery, especially through the expanded SALT cap and clarified entity rules, while also tightening compliance.

In practice:
A $2 million home in California now produces roughly $7,400 more in annual federal tax savings under the new law.
Combined with proper income and entity planning, this can result in over $70,000 in additional long-term savings.

At Flex Tax & Consulting Group, we help clients structure real estate purchases and ownership plans to align with the latest tax legislation — ensuring every major financial decision maximizes after-tax results.

Don’t just buy a home. Structure it — the right way, the first time.

The post Buying a Home Before vs. After OBBBA: How the Rules Change for High-Income Individuals appeared first on Flex Tax and Consulting Group (FTCG).

Equity compensation can be a powerful wealth-building tool — but without careful tax planning, it often becomes a hidden tax trap.
Every year, we meet clients who thought selling their company stock was simple: “I’ll just sell my RSUs when they vest.”
What they didn’t realize is that the timing, reporting, and coordination of those sales can make a difference of thousands of dollars in extra taxes — even when everything seems properly reported on their W-2.

At Flex Tax & Consulting Group, we specialize in helping employees and executives understand the true tax cost of equity income.
Let’s break down how Restricted Stock Units (RSUs) and Employee Stock Purchase Plans (ESPPs) are taxed — and how a personalized strategy can protect your hard-earned equity.

Understanding How RSUs Are Taxed

Restricted Stock Units are a form of compensation your employer grants as part of your pay package. You don’t own the shares until they vest — that’s when they become legally yours and taxable.

When your RSUs vest, their fair market value is added directly to your W-2 as ordinary income. This means:

• You pay federal, state, Social Security, and Medicare taxes on that value.
• Most companies automatically withhold some shares to cover taxes, but the default withholding rate (often 22% federal) may be far lower than your actual marginal rate if you’re a high earner.

For example:
If 1,000 RSUs vest at $100 per share, you’ll report $100,000 of ordinary income.
If you later sell at $120, the $20,000 difference is considered a capital gain.
Sell within one year, and it’s short-term (taxed like income). Hold longer than a year, and it’s long-term (taxed at 15–20%, depending on your bracket).

This simple difference in timing can mean thousands of dollars in additional savings.

However, RSUs create another challenge: they can push you into a higher tax bracket or trigger phaseouts for credits and deductions. Without adjusting your withholdings or making estimated payments, you might face a surprise balance due the following April.

That’s why a proactive RSU plan doesn’t just focus on “when to sell” — it integrates cash-flow management, bracket control, and timing of charitable deductions or retirement contributions to offset that spike in income.

Understanding How ESPPs Are Taxed

Employee Stock Purchase Plans let you buy your company’s stock at a discount — usually between 5% and 15%. While that sounds simple, the IRS applies two layers of tax rules depending on how long you hold those shares.

When you purchase shares through an ESPP, the discount you receive is considered ordinary income.
What happens next depends on how long you keep the shares:

• If you hold them at least two years from the offering date and one year from the purchase date, the sale qualifies as a “qualified disposition.”
  In that case, only the discounted portion is taxed as ordinary income, and the rest of your gain is long-term capital gain, which enjoys a lower rate.
• If you sell before meeting those timelines, it’s a “disqualifying disposition.”
  The entire gain — from purchase price to sale price — is treated as ordinary income, potentially taxed up to 37% federally (plus state tax).

For instance, let’s say you buy ESPP shares at $85 when the market price is $100 and sell later at $120.
If it’s a disqualifying sale, you’ll owe ordinary tax on the entire $35 per share.
If it’s qualifying, only the $15 discount is ordinary income, and the $20 difference is long-term capital gain — typically taxed much lower.

Why Holding Periods and Timing Matter

The key to optimizing RSU and ESPP taxes is understanding that the calendar controls your tax rates.
Selling the day after vesting might minimize market risk but maximizes your tax rate.
Holding too long might lower your tax rate but expose you to price volatility.

Strategic timing — especially when you coordinate it with your salary, bonuses, or year-end tax moves — can achieve a balance:

• Selling enough RSUs early to cover your tax liability.
• Holding selected ESPP shares until the qualifying date for lower rates.
• Offsetting large stock gains with tax-loss harvesting in your brokerage portfolio.
• Making charitable stock donations of appreciated shares for double benefits (deduction + no capital gain).

These aren’t one-size-fits-all decisions. The “best” strategy depends on your income level, state of residence, employer’s stock performance, and cash flow needs.

Common RSU and ESPP Mistakes We See

1. Selling all RSUs immediately after vesting without modeling the tax outcome.
   Many employees assume the company’s withholding covers everything. It rarely does, leading to unexpected tax bills.
2. Failing to coordinate RSU income with other compensation.
   Vesting events that align with bonuses, option exercises, or ESPP purchases can push income into a higher bracket unnecessarily.
3. Ignoring the Alternative Minimum Tax (AMT).
   While RSUs and ESPPs generally don’t trigger AMT, other stock-based incentives (like ISOs) often do — and many professionals hold multiple plans simultaneously.
4. Reporting errors between W-2 and brokerage forms.
   Brokerage 1099-Bs often omit cost basis adjustments for RSUs, causing double taxation unless corrected.
5. Overconcentration risk.
   Holding too much employer stock for tax reasons can expose you to company-specific risk — which can undo all tax savings if the stock price falls.

Integrating Equity Compensation Into a Tax Strategy

At Flex Tax & Consulting Group, our advisory process goes beyond tax filing. We:

• Review vesting schedules and forecast tax impact before year-end.

• Model multiple sale scenarios (immediate vs. deferred) to estimate real after-tax returns.

• Coordinate estimated tax payments to avoid penalties.

• Integrate stock activity with your overall financial plan — including retirement savings, charitable giving, and real estate strategies.

• Provide audit-ready documentation so your equity reporting is consistent across your W-2, 1099-B, and Form 8949.

Every professional’s equity story is unique — and so should their tax strategy be.

The Bottom Line

RSUs and ESPPs can be a path to significant wealth, but without proactive planning, they often create unexpected tax burdens.
By understanding how and when your shares are taxed — and by modeling your sales before execution — you can keep more of what you’ve earned and avoid year-end surprises.

Whether you’ve just received your first grant or are managing years of accumulated shares, our team can help you design a tax-efficient exit plan tailored to your goals.

Schedule an appointment with us today to discuss your situation – https://flextcg.com/appointment/

The post Selling RSUs or ESPP Shares Without a Tax Plan: How to Avoid Overpaying the IRS appeared first on Flex Tax and Consulting Group (FTCG).

Recommend Solo 401K Platform – Solo 401K

This guide compares how Sole Proprietorships (or Single-Member LLCs) and S Corporations (S-Corps) affect Solo 401(k) contribution potential, tax exposure, and administrative responsibilities.

Solo 401(k) Contribution Comparison (Based on $400,000 Profit)

Analysis: Sole Proprietor vs. S-Corp

Sole Proprietor or Single-Member LLC

Pros:

• Simple to operate, no payroll setup needed.

• Easier to max out retirement contributions under Solo 401(k) rules.

• All profits (after adjustment) are eligible for employer-side 401(k) contributions.

Cons:

• Entire net income is subject to self-employment tax.

• Limited tax planning flexibility compared to an S-Corp.

S Corporation

Pros:

• Split income between W-2 salary and distributions to reduce self-employment taxes.

• Distributions are not subject to FICA/SE tax.

• Better long-term tax planning as income scales.

Cons:

• Requires formal payroll and additional administrative work.

• 401(k) contributions based only on W-2 wages.

• A high salary may be required to reach the Solo 401(k) cap.

Which Option Is Right for You?

If you are located in the Bay Area and earning over $150,000, setting up an S-Corp in California may offer meaningful tax savings over time. However, if you prefer a leaner structure while still contributing aggressively to your retirement, a Sole Proprietorship or Single-Member LLC may serve you better.

Talk to a Bay Area Tax Advisor

At Flex Tax and Consulting Group, we specialize in Solo 401(k) planning, entity structuring, and tax reduction strategies for independent contractors, consultants, and small business owners across the San Francisco Bay Area, especially in Castro Valley and San Francisco.

We offer personalized consultations to evaluate whether an S-Corp is right for you, how to structure your compensation, and how to legally minimize your tax burden.

Schedule a consultation today:
https://flextcg.zohobookings.com/#/taxadvisory

About Flex Tax and Consulting Group

Flex Tax is a full-service tax advisory firm based in the Bay Area. We support professionals, founders, and investors throughout San Francisco, Castro Valley, and beyond with proactive, year-round planning beyond just filing returns.

Related Post:

Navigating Retirement Savings: Roth IRA vs. 401(k)

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You may have taken some extra rooms for your business use. Is that okay?

Section 280A(c) states that you may claim a home office based on the portion of the dwelling that you use exclusively and regularly for business. Thus, the law dictates no specific number of rooms or particulars regarding the size of the office.

The courts make this rule clear, as you can see in the Mills (less than one room) and Hefti (lots of rooms) cases described below.

The Mills Case

Albert Victor Mills maintained an office in his apartment from which he conducted his rental property management business. The apartment was small, totaling only 422 square feet. In the office area of the apartment where Mr. Mills had his desk, he also kept tools, equipment, paint supplies, and a filing cabinet.

The court agreed with Mr. Mills’s allocations and awarded the home-office deduction based on his claimed 23 percent business use of the 422-square-foot apartment.

Planning note. Mr. Mills did not have a single room dedicated to a home office. He had only an area of the apartment where he grouped his office furnishings, equipment, and supplies. If you have a similar situation, make sure your business assets are located in a group.

The Hefti Case

Charles R. Hefti lived in a big house, totaling 9,142 square feet. He claimed that more than 90 percent of his home was used regularly and exclusively for business.

Based on its review of the rooms, the court concluded that 13 rooms, totaling 19 percent of the home, were used exclusively and regularly for business.

Insights

The deductible portion of your home for an office includes the area used exclusively and regularly for business.

Let’s say you have an office in one room and your files in a second room, and you never use these rooms for personal purposes. Further, let’s say you use the office area on a daily basis and the file area in connection with that daily work.

Both rooms would meet the exclusive and regular use requirements, just as Mr. Mills’s and Mr. Hefti’s offices met these rules.

But Not This

“Exclusive use” means that you must use a specific portion of the home only for business purposes. You must make no other use of the space.

Exception. One exception to the exclusive use rule is storage of inventory or product samples if the home is the sole fixed location of a trade or business selling products at retail or wholesale.

Example 1. Your home is the only fixed location of your business, which involves selling mechanics’ tools at retail. You regularly use half of your basement for storage of inventory and product samples. You sometimes use the area for personal purposes. The expenses for the storage space are deductible even though you do not use this part of your basement exclusively for business.

Example 2. In Pearson, Dr. Pearson practiced orthodontics in a downtown medical building but retained the dental records of more than 3,000 patients in 36 file drawers (each measuring 26 inches by 14 inches by 12 inches) and had 1,461 boxes containing orthodontic models (each box measuring 10 inches by 6 inches by 2 1/2 inches).

He stored the records in the attic and basement of his home. The areas used for such storage were not separate rooms, and the remaining portions of the attic and basement were used by Dr. Pearson and his family for personal purposes.

The court ruled that Dr. Pearson may not treat the storage areas as home-office expenses because the records were not inventory or samples and Dr. Pearson did not operate a wholesale or retail trade or business from his home.

To be better understand the home office allocation detailed information. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

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If so, is your S corporation salary

• nonexistent?
• too low?
• too high?
• just right?

Getting the S corporation salary right is important. First, if it’s too low and you get caught by the IRS, you will pay not only income taxes and self-employment taxes on the too-low amount, but also both payroll and income tax penalties that can cost plenty.

Second, in most cases, the IRS is going to expand the audit to cover three years and then add the income and penalties for those three years.

Third, after being found out, you likely are now stuck with this higher salary, defeating your original purpose of saving on self-employment taxes.

Getting to the Number

The IRS did you a big favor when it released its “Reasonable Compensation Job Aid for IRS Valuation Professionals.”

The IRS states that the job aid is not an official IRS position and that it does not represent official authority. That said, the document is a huge help because it gives you some clearly defined valuation rules of the road to follow and takes away some of the gray areas.

Market Approach

The market approach to reasonable compensation compares the S corporation’s business with others and then looks at the compensation being paid by those businesses to employees who look like you, the shareholder-employee who is likely the CEO.

The question to be answered is, how much compensation would be paid for this same position, held by a nonowner in an arm’s-length employment relationship, at a similar company?

In its job aid, the IRS states that the courts favor the market approach, but because of challenges in matching employees at comparable companies, the IRS developed other approaches.

Cost Approach

The cost approach breaks your employee activities into their components, such as management, accounting, finance, marketing, advertising, engineering, purchasing, janitorial, bookkeeping, clerking, etc.

Here’s an example of how the cost approach works to support a $71,019 salary as reasonable compensation for this S corporation owner whose corporation had $3.5 million in revenue and 19 employees:

Health Insurance

The S corporation’s payment or reimbursement of health insurance for the shareholder-employee and his or her family goes on the shareholder-employee’s W-2 and counts as compensation, but it’s not subject to payroll taxes, so it fits nicely into the payroll tax savings strategy for the S corporation owner.

Pension

The S corporation’s employer contributions on behalf of the owner-employee to a defined benefit plan, simplified employee pension (SEP) plan, or 401(k) count as compensation but don’t trigger payroll taxes. Such contributions further enable the savings on payroll taxes while adding to the dollar amount that’s considered reasonable compensation.

Planning note. Your S corporation compensation determines the amount that your S corporation can contribute to your SEP or 401(k) retirement plan. The defined benefit plan likely allows the corporation to make a larger contribution on your behalf.

Section 199A Deduction

The S corporation’s net income that is passed through to you, the shareholder, can qualify for the 20 percent Section 199A tax deduction on your Form 1040.

To be better understand the S Corporation Salary’s detailed information. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

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1. Tenants who can’t pay the rent.
2. Tax losses they can’t deduct.

We’ll start with the tenants and then move on to the rental property tax-loss issues.

For the first time in U.S. history, residential landlords are subject to a sweeping nationwide federal moratorium on evictions for nonpayment of rent through the end of 2020.

There is no moratorium on landlords’ responsibility to pay their bills. Thus, landlords need to prepare for some of the rockiest times in decades.

The Federal Moratorium on Residential Evictions

The Centers for Disease Control and Prevention (CDC) and the Department of Health & Human Services issued the latest federal moratorium on evictions. It is an emergency health measure intended to help prevent the spread of COVID-19.

The CDC order is effective September 4, 2020, through December 31, 2020. The order replaces an eviction moratorium put in place on March 27, 2020, by the Coronavirus Aid, Relief, and Economic Security (CARES) Act that expired July 24, 2020.

The CDC order generally bars residential landlords from evicting tenants for nonpayment of rent if a tenant’s estimated 2020 income is no more than $99,000 (single) or $198,000 (married, filing jointly).

Unlike the CARES Act moratorium, which applied only to multifamily rental properties with rental subsidies or federally backed mortgages, the CDC order applies to all types of residential rentals: houses, duplexes, apartment buildings, mobile homes, and mobile home spaces. There is no requirement that the rental be federally financed or rent subsidized.

The CDC order does not apply to commercial properties, including motels and hotels. Nor does it apply to guesthouses rented to temporary guests or seasonal tenants—this presumably excludes most Airbnb and similar short-term rentals.

To prevent an eviction, a tenant need only give the landlord a declaration signed under penalty of perjury providing that the tenant

• has used his or her best efforts to obtain all available government assistance for rent or housing;
• falls within the income restrictions ($99,000 or $198,000 in income for 2020);
• is unable to pay the full rent due to substantial loss of household income, loss of work or wages, or extraordinary out-of-pocket medical expenses;
• is using his or her best efforts to make partial payments that are as close to the full rental payments as the tenant’s circumstances permit; and
• would likely become homeless or forced to move into and live in close quarters or a shared living space.

Tenants need not provide their landlord with any proof that the statements in the declaration are true. The CDC has created a form declaration for tenants to use.

There is no time limit on when tenants must provide this declaration to their landlord—they can do so anytime before or after receiving a termination notice.

Individual landlords who violate the CDC order are subject to a fine of up to $100,000 and up to one year in jail, if the violation does not result in a death.

The fine goes up to $250,000 if the violation results in a death (it’s unclear how the government could prove an eviction caused a tenant’s death).

The fines are doubled for organizations such as LLCs, corporations, and REITs.

Help Tenants Get Help

The CDC order requires tenants to seek government aid to help pay their rent. But they need not seek help from nongovernment sources such as churches or private charities.

It is to your advantage to help your tenants obtain such aid. After all, you would like the rent to get paid. And you likely would want to keep the tenant—assuming this is a good tenant. Links to government programs providing financial assistance for renters are available at https://legalfaq.org.

Work Out a Payment Plan

Try to work out payment plans with struggling tenants. This is in their best interests as well as your own. Be sure to get the terms in writing.

For example, if a tenant’s income has declined by 20 percent, you could agree to accept a 20 percent rent reduction through the end of the year and require the tenant to pay the balance due over 2021. Make it clear that this is a partial rent payment and does not satisfy the tenant’s full rental obligation.

You are under no obligation to offer a tenant a permanent rent reduction or any form of rent forgiveness.

And keep in mind that your government is not going to reward your generosity. You get no tax deduction or other tax benefit for reducing or forgiving rent. This doesn’t mean you shouldn’t do it. Just don’t expect the tax code to reward your generosity.

Unpaid Rent Is Not Tax-Deductible

Bad news. Unpaid rent is not a tax-deductible rental expense. Rather, it is a debt owed to you by your tenant. You get no tax deduction for the unpaid rent even if tenants never pay the rent they owe.

Good news. On the plus side, unpaid rent is not taxable as income, is not reported on your tax return, and increases the chances that you will have a rental property tax loss (deductible, we hope). This assumes you are a cash-basis taxpayer, as virtually all residential landlords are.

Deducting Rental Property Tax Losses

You have a rental loss if the total annual expenses you incur for your rentals (mortgage interest, taxes, utilities, insurance, maintenance, depreciation, and other expenses) exceed your total rental income (which does not include unpaid rent).

It’s likely that many landlords who ordinarily have profitable rentals will suffer rental losses for 2020 because their tenants failed to pay all or part of their rent.

The dreaded passive activity loss rules prevent many landlords from deducting all or part of their rental losses from their non-rental income.

Rental losses are always classified as passive losses. Subject to two important exceptions, the general rules are as follows:

• Passive losses are deductible only from passive income—income from rental activities and from businesses in which you do not materially participate.
• Passive losses are not deductible either (a) from ordinary income such as salary and self-employment earnings, or (b) from investment income such as dividends or interest.

Exception 1. $25,000 Allowance for Rental Real Estate

The tax law takes pity on landlords with a relatively modest income and permits them to deduct a limited amount of rental losses from non-rental income.

If your modified adjusted gross income for the year is under $100,000, you may deduct up to $25,000 in total annual rental losses from your nonpassive income, provided that you actively participate in the management of your rentals (an easy standard to meet).

Exception 2. Real Estate Professional Exemption from Passive Loss Rules

There’s another way you may be able to deduct your rental losses from non-rental income no matter how high your income: the real estate professional exemption from the passive loss rules.

If you qualify as a tax law–defined real estate professional and materially participate in your rental activity, you may treat rental losses as nonpassive and deduct them from all other nonpassive income without limit for 2020.

Either you or your spouse will qualify as a real estate professional for the year if one of you spends

• more than half your personal service work time in real property trades or businesses in which you materially participate, and
• more than 750 hours of your personal service work and investment analysis time in real property trades or businesses in which you and/or your spouse materially participate.

In addition to the standard described above, you and/or your spouse must materially participate in a rental activity to enable the tax loss deduction against your other income. There are various methods for establishing material participation. The two most common are working more than 500 hours in a tax law–grouped multi-rental activity and working more than 100 hours more than anyone else on individual non-grouped properties.

People with a full-time job outside the tax law–defined real estate industry can rarely qualify as real estate professionals.

Non-deductible Rental Losses Become Suspended Passive Losses

You don’t lose rental losses you can’t deduct because of the passive loss rules. Instead, the losses become suspended passive losses. They are carried forward indefinitely and deducted from passive income each year until they are used up.

You may also deduct your suspended passive losses if you sell or otherwise dispose of substantially all your interest in your rental property in a taxable transaction.

To be better understand the Government to landlords’ detailed information. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

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Nonprofits

The nonprofit organization is a charitable entity with specific social goals that uses its income and surplus to fund operations, rather than benefiting members, shareholders, employees, or leaders of the organization. The remaining profit is further used to achieve its goals. Nonprofit organizations accept donations from governments, foundations, institutions, and individuals, to name a few. These funds are then used for the charity work set. They can conduct activities in research, religious, educational, and even scientific environments and are tax-free.

Foundations

A foundation is an organization that does not qualify as a public charity. They are very similar to nonprofit organizations, except that the funds for foundations usually come from family or corporate entities. In contrast, the funds for nonprofit organizations generally come from their income.

Technically speaking, donations can be made to private foundations, but many foundations do not accept it. As an alternative, they use the funds initially used for investment and allocate the funds generated from these investments. The foundation will also donate these funds to other nonprofit organizations in the form of gifts or grants.

Private foundations have the following subsets: operational and non-operational. Private non-operating foundations donate to other charitable organizations, which is a more common form. The foundation also does not directly execute charitable programs or services. Privately operated foundations allocate funds to their own projects that exist for charitable purposes.

Summary of Nonprofit VS. Foundation

A nonprofit organization refers to a charitable organization with specific social goals that use its income and surplus to fund operations, rather than benefiting members, shareholders, employees, or leaders. They receive funds from governments, foundations, institutions, and individuals, and do not donate to other charities. On the other hand, a foundation refers to a charitable organization that raises funds from its founder. It can be a corporate entity or a family. They can get funds from private foundations, companies, governments, individuals, companies, or families. However, both of them play a significant charitable role in society.

To be better understand the difference between a non-profit organization and a private foundation. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

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Non-resident foreigners can also apply this exclusion. However, because non-resident aliens are not eligible to submit a joint return, each person designated as a non-resident alien needs to share its share of the national resident exclusion tax in a separate tax return. In practice, this means that if the sale proceeds exceed $250,000, each filer will need to 1) be eligible to apply for the exemption of the primary residence on their own, and 2) file Form 1040NR U.S. Nonresident Alien Income Tax Return and state the ownership share of the principal residence.

According to the ” Foreign Investment in Real Property Tax Act ” (“FIRPTA”), non-resident foreigners should also pay additional tax other. For primary residences where the realized amount of sale (usually the sale price) is less than $300,000, no withholding is required; for sales between $300,000 and $1,000,000, the withholding tax rate is 10%; if the sales exceed $1,000,000, The withholding rate is 15%. Non-resident foreign taxpayers may find themselves eligible to claim the exclusion of the primary residence stipulated in IRC § 121, so FIRPTA withholding taxes will exceed his/her highest tax liability in the transaction. In this case, the taxpayer can request the US Internal Revenue Service to provide proof of withholding tax to the buyer, indicating that the withholding tax rate they owe is low or not at all. Since the primary residence exclusion in IRC § 121 does not constitute a non-recognition provision within the meaning of FIRPTA (non-recognition provision makes FIRPTA not applicable at all), unless the purchaser obtains a withholding certificate, the buyer must withhold the appropriate tax rate.

Tax treatment for gain from sale of principal residence can be tricky. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

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What Is a Special Tax Allocation?

A special tax allocation is an allocation of an item of partnership loss, deduction, income, or gain among the partners that’s disproportionate to the partners’ overall ownership interests.

The best measure of a partner’s overall ownership interest is the partner’s stated interest in partnership distributions and capital, as stated in the partnership agreement.

Example. An allocation of 80 percent of a partnership’s 2020 tax loss to Partner A, whose stated ownership is only 25 percent, is a special allocation of the tax loss.

Pass-Through Taxation

After the partnership allocates its tax items among the partners, the allocated amounts (including any special allocations) are passed through to the partners on their annual Schedules K-1 received from the partnership.

Each partner then takes the passed-through amounts reported on Schedule K-1 into account on the partner’s federal income tax return (Form 1040 for an individual partner).

The partnership itself does not pay federal income tax. You and the other partners pay tax at the owner level. This is called pass-through taxation, because the tax consequences of the partnership’s activities are passed through to you and the other partners.

Key point. If you run your business as an S corporation, the pass-through taxation principle applies there too. But you’re not allowed to make special allocations of S corporation tax items among the shareholders.

Instead, you must allocate all tax items strictly in proportion to stock ownership. So, the ability to make special tax allocations is often a key selling point of partnership status as opposed to S corporation status.

How Special Tax Allocations Work

A partnership special tax allocation arrangement might work like this.

During the first few years of operation, when tax losses are expected, a disproportionately large percentage of the losses are specially allocated to the partners who need tax losses the most.

These may be the partners who supplied most of the initial capital, and they may be passive limited partners who are really just investors.

The other partners may be the ones who actually run the partnership’s business or investment activities, and they may be the general partners of a limited partnership. These partners are allocated a disproportionately small amount of the losses during the start-up phase when losses are expected.

In later years, the partnership is expected to generate positive taxable income and/or gains. Otherwise, the partnership was a bad idea to begin with.

The partnership will allocate a disproportionately large percentage of these later-year income and gain items to the partners who received earlier special allocations of losses. After these later-year special allocations of income and gain have offset the earlier special allocations of losses, all partnership tax items are allocated in proportion to the partners’ stated ownership percentages.

The special allocation phase of the partnership is over, and life goes on.

On a cradle-to-grave basis, you expect that all partners will receive cumulative allocations of taxable losses, deductions, income, and gain in proportion to their stated ownership percentages. So, the special allocations simply affect the timing of when you and the other partners recognize losses, deductions, income, and gain.

While the preceding description of a special allocation arrangement is often accurate, you can also have special allocations of specific tax items, such as depreciation, rather than special allocations of overall partnership losses.

Special allocations are tricky business. I’m here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston) and e-mail us at info@flextcg.com.

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1. Partner’s Self-Employment Income Creates Cash and Forgiveness

Just as sole proprietors failed originally to ask for their PPP cash assistance, so did many partners.

Three things to note here:

1. The partnership (not the individual partner) applies for the PPP loan.
2. The deemed payroll amount that the partnership uses for the partners is their 2019 self-employment income (both guaranteed payments and ordinary income).
3. If the partnership filed for the PPP loan based on its employees, but failed to include any dollar amount for the partners, the U.S. Small Business Administration (SBA) in an interim final rule authorizes the lender to increase the loan amount for the appropriate partners’ deemed payroll inclusion that was left out of the original application.

2. Paid and Capped

Line 9 of the SBA official forgiveness application reads as below:

Line 9: Enter any amounts paid to owners (owner-employees, a self-employed individual, or general partners). This amount is capped at $15,385 (the eight-week equivalent of $100,000 per year) for each individual or the eight-week equivalent of their applicable compensation in 2019, whichever is lower.

Note the word “paid.”

In general, payments to partners don’t occur in a pattern that would equal the amount needed during the eight-week covered period.

To protect the partnership’s forgiveness amount, make sure that payments to partners during the eight-week covered period equal the 8/52 of the partners’ deemed 2019 payroll. We have not seen a requirement on the “paid” part, but that word is there. So protect yourself.

3. Qualifying Non-Payroll Expenses

When explaining that the partnership had to file for the PPP loan and forgiveness, the SBA stated:

Rent, mortgage interest, utilities, and other debt service are generally incurred at the partnership level, not partner level, so it is most natural to provide the funds for these expenses to the partnership, not individual partners.

4. Apply

If your partnership has not applied for its PPP money, do it now. The SBA has plenty of money available for PPP loans at the moment, but you have to think it won’t last long.

5. Easier Forgiveness on the Way

On Thursday, May 28, the U.S. House of Representatives approved the Paycheck Protection Program Flexibility Act of 2020 by a vote of 417-1. This bill or something similar will be enacted in June to make it easier for all PPP borrowers to qualify for PPP loan forgiveness.

Here are some highlights from this bill:

• Extends the eight weeks to 24 weeks
• Changes the 75 percent rule to 60 percent
• Changes the two years to five years and retains the 1 percent interest rate
• Changes June 30 to December 31
• Adds exemptions that will increase full-time equivalents and that will increase forgiveness amounts

Will make it easier to obtain forgiveness when you have reductions in your employee

If you need our assistance with either the PPP loan or forgiveness, we are here to be of service. Our office e-mail is info@flextcg.com and the office number is 415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston).

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But what about the individuals? The most noted benefit that individual filers received was the Economic Impact Payment, which depended on adjusted gross income thresholds. Those who lost their jobs or had work hours reduced could apply for unemployment benefits or Pandemic Unemployment Assistance. With millions of people collecting unemployment and unsure what their cash flow might look like in the future, this may not be enough. The good news is there may be another way for individuals to get their hands on some much-needed cash.

Taxpayers who have already filed 2019 individual income tax returns reflecting an overpayment applied to 2020 may elect (retroactively) to receive this overpayment as a refund instead. Pursuant to a 1977 Revenue Ruling, this process is relatively simple. There is no need to file an amended return for 2019, but rather a “Superseded Return.” When filing the superseded return, simply indicate that the overpayment should be refunded instead of carried forward. The superseded return will replace the original 2019 return.

There are a couple things to note. Most importantly, the superseded return needs to be filed before the original due date for your 2019 return. The original due date for filing 2019 individual income tax returns is July 15, 2020 (extended from April 15, 2020 under the CARES Act). Superseded returns must be paper filed and mailed to the appropriate IRS processing center. (The mailing address can be found within the Form 1040 filing instructions.) As with most returns that are paper filed, processing could be delayed; however, providing banking information on the return will speed up the payment by four to six weeks.

For questions about filing a superseded return or receiving a refund of your tax overpayment, contact your Flex Tax tax advisor.

The post TAX RELIEF FOR INDIVIDUALS: CONSIDER CHANGING 2019 OVERPAYMENT FROM A CARRYFORWARD TO A REFUND appeared first on Flex Tax and Consulting Group (FTCG).

The IRS defers stating or foreign law to determine whether you have a valid marriage. In most cases, a marriage in a foreign country is valid for U.S. tax purposes.

“Can I File Single if Married to Non-Resident Alien?”

Generally, no, you can’t file single if you’re married to a non-resident alien. Married individuals are not allowed to file under the single filing status, and when you are married to a non-resident alien (referred to as a nonresident spouse), you are also unable to file a joint return unless a separate election is made to do so.

Here are the options when you are married to a non-U.S. citizen. You should consider the options carefully, as each will have a different effect on your tax and reporting requirements.

1 – Filing Married Filing Separately

The default filing status for a U.S. citizen married to a nonresident alien spouse is Married Filing Separately (MFS). While the MFS filing status does not pose any additional hurdles for getting your return easily filed, it does come at a cost.

The biggest downsides to married filing separately for a resident or U.S. citizen spouse is the loss of some potential tax credits and deductions and overall higher tax rates. If you are married to a nonresident spouse and do not have any dependents to claim, this may be the only filing status available to you.

2 – Filing Head of Household

The more beneficial option is available if you do have a dependent is to file using the Head of Household filing status. To file as Head of Household, you must have a qualifying person for head of household purposes and meet the tests to use Head of Household status.

In order to use this filing status, you must:

• Be considered unmarried, and
• Maintain as your home a household for the qualifying person for more than half of the year, or
• Maintain a home for your parent you can claim as a dependent. Your parent does not have to live with you.

You cannot claim your spouse who lives overseas as a dependent, but you can claim other people who are U.S. citizens, U.S. nationals, or U.S. residents or residents of Canada or Mexico. The qualifying person must meet all the rules or Head of the Household status is unavailable.

In many cases, this is the most beneficial status available when you are married to a nonresident spouse because it is accompanied by lower tax rates and additional deductions. Just remember, this status also requires your dependent to have a valid social security number or ITIN.

3 – Filing Married Filing Jointly

The final option is to make an election to treat your nonresident spouse as a U.S. resident for tax purposes. Making this election allows you and your spouse to file a Married Filing Jointly (MFJ) tax return. Filing MFJ will allow you both to take advantage of lower tax rates and deductions that are otherwise not available to MFS filers. However, it will also subject your spouse’s entire income to U.S. taxation and possibly subject your spouse to other information reporting requirements. FBAR and Form 8938 filing is required if you file MFJ.

Practically speaking, this status is most beneficial if your spouse does not earn any income or otherwise has any accounts or investments that may cause negative tax consequences from the U.S. side.

One additional hurdle for choosing this option will be the requirement for your spouse to obtain an Individual Taxpayer Identification Number (ITIN) if they’re not eligible for a Social Security number. So, both spouses need to have either an SSN or ITIN. (Applying for an ITIN requires you to gather additional documentation that must be sent to the IRS. It could also cause delays in the processing of your return.)

Marrying a Non-U.S. Citizen? Get Help

Hopefully, questions like “Can I claim my wife who lives overseas?” and other tricky tax questions about marrying a non-U.S. citizen are answered in this post. But, before you file your return, discuss the best filing status for your particular situation with a tax advisor. The experts at Flex Tax s can assist you with this decision. To set up a free consultation, please visit www.flextcg.com/remote.

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